Certified Government Financial Manager (CGFM) Practice Exam 2025 - Free CGFM Practice Questions and Study Guide

Tax deferrals allow taxpayers to pay taxes later without incurring penalties. This mechanism enables individuals and businesses to postpone their tax payments to a future date, typically until a specific event occurs, such as the withdrawal of funds from a retirement account or the realization of income.

This flexibility is advantageous as it can provide taxpayers with the opportunity to manage their cash flow more effectively. By delaying tax payments, taxpayers can strategically invest or utilize their income in the present, potentially increasing their overall financial health before the tax obligation arises.

The other options do not accurately describe the nature of tax deferrals. While avoiding taxes altogether might sound appealing, it is not a characteristic of tax deferrals, as the taxes are ultimately still owed. Increasing taxable income is counterproductive to the goal of tax deferral, which aims to manage and often reduce the current tax liability. Similarly, receiving tax credits immediately does not pertain to deferrals, as tax credits reduce tax liability in the year they are applied, rather than deferring payment.